Intrinsic value of Kraft Heinz - KHC

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$91.60

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$91.60

 
Intrinsic value

$65.47

 
Up/down potential

-29%

 
Rating

sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of KHC stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 111.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  44.44
  44.40
  40.46
  36.91
  33.72
  30.85
  28.27
  25.94
  23.84
  21.96
  20.26
  18.74
  17.36
  16.13
  15.01
  14.01
  13.11
  12.30
  11.57
  10.91
  10.32
  9.79
  9.31
  8.88
  8.49
  8.14
  7.83
  7.55
  7.29
  7.06
  6.86
Revenue, $m
  26,487
  38,247
  53,722
  73,553
  98,357
  128,700
  165,078
  207,897
  257,470
  314,012
  377,644
  448,407
  526,269
  611,144
  702,907
  801,409
  906,490
  1,017,997
  1,135,787
  1,259,744
  1,389,779
  1,525,840
  1,667,913
  1,816,023
  1,970,240
  2,130,673
  2,297,473
  2,470,832
  2,650,983
  2,838,195
  3,032,776
Variable operating expenses, $m
 
  19,842
  26,084
  34,084
  44,091
  56,331
  71,006
  88,280
  108,278
  131,088
  156,757
  180,891
  212,302
  246,541
  283,559
  323,295
  365,686
  410,669
  458,187
  508,192
  560,649
  615,537
  672,851
  732,600
  794,812
  859,532
  926,821
  996,756
  1,069,430
  1,144,953
  1,223,449
Fixed operating expenses, $m
 
  5,509
  5,647
  5,788
  5,933
  6,081
  6,233
  6,389
  6,549
  6,713
  6,880
  7,052
  7,229
  7,409
  7,595
  7,785
  7,979
  8,179
  8,383
  8,593
  8,808
  9,028
  9,253
  9,485
  9,722
  9,965
  10,214
  10,469
  10,731
  10,999
  11,274
Total operating expenses, $m
  20,345
  25,351
  31,731
  39,872
  50,024
  62,412
  77,239
  94,669
  114,827
  137,801
  163,637
  187,943
  219,531
  253,950
  291,154
  331,080
  373,665
  418,848
  466,570
  516,785
  569,457
  624,565
  682,104
  742,085
  804,534
  869,497
  937,035
  1,007,225
  1,080,161
  1,155,952
  1,234,723
Operating income, $m
  6,142
  12,896
  21,990
  33,680
  48,333
  66,288
  87,838
  113,228
  142,643
  176,211
  214,006
  260,463
  306,739
  357,194
  411,753
  470,329
  532,825
  599,149
  669,217
  742,959
  820,322
  901,275
  985,809
  1,073,939
  1,165,706
  1,261,175
  1,360,438
  1,463,607
  1,570,822
  1,682,243
  1,798,053
EBITDA, $m
  7,479
  20,548
  30,953
  44,323
  61,077
  81,601
  106,233
  135,249
  168,863
  207,221
  250,405
  298,443
  351,314
  408,958
  471,290
  538,208
  609,605
  685,373
  765,419
  849,660
  938,037
  1,030,514
  1,127,081
  1,227,756
  1,332,585
  1,441,643
  1,555,034
  1,672,887
  1,795,360
  1,922,638
  2,054,929
Interest expense (income), $m
  1,176
  1,218
  2,317
  3,764
  5,618
  7,938
  10,775
  14,177
  18,181
  22,816
  28,103
  34,054
  40,671
  47,951
  55,888
  64,469
  73,679
  83,505
  93,932
  104,947
  116,538
  128,697
  141,420
  154,705
  168,555
  182,975
  197,977
  213,574
  229,785
  246,631
  264,137
Earnings before tax, $m
  5,023
  11,678
  19,673
  29,916
  42,715
  58,350
  77,063
  99,051
  124,462
  153,395
  185,903
  226,410
  266,068
  309,242
  355,865
  405,860
  459,146
  515,644
  575,285
  638,013
  703,785
  772,578
  844,389
  919,234
  997,151
  1,078,200
  1,162,461
  1,250,033
  1,341,037
  1,435,612
  1,533,916
Tax expense, $m
  1,381
  3,153
  5,312
  8,077
  11,533
  15,754
  20,807
  26,744
  33,605
  41,417
  50,194
  61,131
  71,838
  83,495
  96,084
  109,582
  123,969
  139,224
  155,327
  172,263
  190,022
  208,596
  227,985
  248,193
  269,231
  291,114
  313,864
  337,509
  362,080
  387,615
  414,157
Net income, $m
  3,632
  8,525
  14,362
  21,839
  31,182
  42,595
  56,256
  72,307
  90,857
  111,978
  135,709
  165,279
  194,230
  225,747
  259,782
  296,278
  335,176
  376,420
  419,958
  465,749
  513,763
  563,982
  616,404
  671,041
  727,920
  787,086
  848,596
  912,524
  978,957
  1,047,997
  1,119,759

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  4,204
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  120,480
  167,751
  235,623
  322,601
  431,390
  564,476
  724,027
  911,830
  1,129,255
  1,377,244
  1,656,334
  1,966,697
  2,308,197
  2,680,456
  3,082,926
  3,514,950
  3,975,834
  4,464,897
  4,981,522
  5,525,192
  6,095,522
  6,692,281
  7,315,406
  7,965,014
  8,641,403
  9,345,055
  10,076,635
  10,836,984
  11,627,119
  12,448,225
  13,301,649
Adjusted assets (=assets-cash), $m
  116,276
  167,751
  235,623
  322,601
  431,390
  564,476
  724,027
  911,830
  1,129,255
  1,377,244
  1,656,334
  1,966,697
  2,308,197
  2,680,456
  3,082,926
  3,514,950
  3,975,834
  4,464,897
  4,981,522
  5,525,192
  6,095,522
  6,692,281
  7,315,406
  7,965,014
  8,641,403
  9,345,055
  10,076,635
  10,836,984
  11,627,119
  12,448,225
  13,301,649
Revenue / Adjusted assets
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
  0.228
Average production assets, $m
  67,315
  97,186
  136,508
  186,898
  249,925
  327,028
  419,463
  528,267
  654,232
  797,904
  959,594
  1,139,402
  1,337,249
  1,552,917
  1,786,087
  2,036,379
  2,303,392
  2,586,729
  2,886,035
  3,201,009
  3,531,428
  3,877,160
  4,238,166
  4,614,515
  5,006,380
  5,414,039
  5,837,878
  6,278,385
  6,736,148
  7,211,854
  7,706,284
Working capital, $m
  -748
  -3,251
  -4,566
  -6,252
  -8,360
  -10,940
  -14,032
  -17,671
  -21,885
  -26,691
  -32,100
  -38,115
  -44,733
  -51,947
  -59,747
  -68,120
  -77,052
  -86,530
  -96,542
  -107,078
  -118,131
  -129,696
  -141,773
  -154,362
  -167,470
  -181,107
  -195,285
  -210,021
  -225,334
  -241,247
  -257,786
Total debt, $m
  32,404
  56,513
  91,806
  137,034
  193,605
  262,809
  345,776
  443,434
  556,495
  685,449
  830,576
  991,964
  1,169,544
  1,363,119
  1,572,403
  1,797,056
  2,036,716
  2,291,029
  2,559,674
  2,842,382
  3,138,953
  3,449,268
  3,773,293
  4,111,089
  4,462,812
  4,828,711
  5,209,132
  5,604,514
  6,015,384
  6,442,359
  6,886,140
Total liabilities, $m
  63,122
  87,231
  122,524
  167,752
  224,323
  293,527
  376,494
  474,152
  587,213
  716,167
  861,294
  1,022,682
  1,200,262
  1,393,837
  1,603,121
  1,827,774
  2,067,434
  2,321,747
  2,590,392
  2,873,100
  3,169,671
  3,479,986
  3,804,011
  4,141,807
  4,493,530
  4,859,429
  5,239,850
  5,635,232
  6,046,102
  6,473,077
  6,916,858
Total equity, $m
  57,358
  80,520
  113,099
  154,848
  207,067
  270,948
  347,533
  437,678
  542,042
  661,077
  795,040
  944,014
  1,107,934
  1,286,619
  1,479,804
  1,687,176
  1,908,400
  2,143,151
  2,391,131
  2,652,092
  2,925,851
  3,212,295
  3,511,395
  3,823,207
  4,147,874
  4,485,626
  4,836,785
  5,201,752
  5,581,017
  5,975,148
  6,384,792
Total liabilities and equity, $m
  120,480
  167,751
  235,623
  322,600
  431,390
  564,475
  724,027
  911,830
  1,129,255
  1,377,244
  1,656,334
  1,966,696
  2,308,196
  2,680,456
  3,082,925
  3,514,950
  3,975,834
  4,464,898
  4,981,523
  5,525,192
  6,095,522
  6,692,281
  7,315,406
  7,965,014
  8,641,404
  9,345,055
  10,076,635
  10,836,984
  11,627,119
  12,448,225
  13,301,650
Debt-to-equity ratio
  0.565
  0.700
  0.810
  0.880
  0.930
  0.970
  0.990
  1.010
  1.030
  1.040
  1.040
  1.050
  1.060
  1.060
  1.060
  1.070
  1.070
  1.070
  1.070
  1.070
  1.070
  1.070
  1.070
  1.080
  1.080
  1.080
  1.080
  1.080
  1.080
  1.080
  1.080
Adjusted equity ratio
  0.463
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,632
  8,525
  14,362
  21,839
  31,182
  42,595
  56,256
  72,307
  90,857
  111,978
  135,709
  165,279
  194,230
  225,747
  259,782
  296,278
  335,176
  376,420
  419,958
  465,749
  513,763
  563,982
  616,404
  671,041
  727,920
  787,086
  848,596
  912,524
  978,957
  1,047,997
  1,119,759
Depreciation, amort., depletion, $m
  1,337
  7,652
  8,963
  10,642
  12,743
  15,313
  18,395
  22,021
  26,220
  31,009
  36,399
  37,980
  44,575
  51,764
  59,536
  67,879
  76,780
  86,224
  96,201
  106,700
  117,714
  129,239
  141,272
  153,817
  166,879
  180,468
  194,596
  209,279
  224,538
  240,395
  256,876
Funds from operations, $m
  6,267
  16,177
  23,324
  32,481
  43,925
  57,909
  74,651
  94,329
  117,078
  142,988
  172,108
  203,259
  238,805
  277,511
  319,318
  364,157
  411,956
  462,644
  516,159
  572,450
  631,477
  693,220
  757,676
  824,858
  894,800
  967,554
  1,043,192
  1,121,803
  1,203,495
  1,288,392
  1,376,635
Change in working capital, $m
  1,029
  -1,000
  -1,315
  -1,686
  -2,108
  -2,579
  -3,092
  -3,640
  -4,214
  -4,806
  -5,409
  -6,015
  -6,618
  -7,214
  -7,800
  -8,373
  -8,932
  -9,478
  -10,012
  -10,536
  -11,053
  -11,565
  -12,076
  -12,589
  -13,108
  -13,637
  -14,178
  -14,736
  -15,313
  -15,913
  -16,539
Cash from operations, $m
  5,238
  15,847
  24,640
  34,167
  46,034
  60,488
  77,743
  97,968
  121,291
  147,794
  177,517
  209,274
  245,423
  284,725
  327,118
  372,530
  420,888
  472,122
  526,172
  582,986
  642,530
  704,786
  769,752
  837,447
  907,908
  981,191
  1,057,370
  1,136,539
  1,218,808
  1,304,305
  1,393,174
Maintenance CAPEX, $m
  0
  -2,244
  -3,240
  -4,550
  -6,230
  -8,331
  -10,901
  -13,982
  -17,609
  -21,808
  -26,597
  -31,986
  -37,980
  -44,575
  -51,764
  -59,536
  -67,879
  -76,780
  -86,224
  -96,201
  -106,700
  -117,714
  -129,239
  -141,272
  -153,817
  -166,879
  -180,468
  -194,596
  -209,279
  -224,538
  -240,395
New CAPEX, $m
  -1,247
  -29,872
  -39,322
  -50,390
  -63,027
  -77,103
  -92,435
  -108,804
  -125,965
  -143,672
  -161,690
  -179,808
  -197,847
  -215,668
  -233,170
  -250,292
  -267,012
  -283,338
  -299,306
  -314,974
  -330,420
  -345,731
  -361,007
  -376,349
  -391,865
  -407,659
  -423,839
  -440,507
  -457,763
  -475,706
  -494,430
Cash from investing activities, $m
  -1,113
  -32,116
  -42,562
  -54,940
  -69,257
  -85,434
  -103,336
  -122,786
  -143,574
  -165,480
  -188,287
  -211,794
  -235,827
  -260,243
  -284,934
  -309,828
  -334,891
  -360,118
  -385,530
  -411,175
  -437,120
  -463,445
  -490,246
  -517,621
  -545,682
  -574,538
  -604,307
  -635,103
  -667,042
  -700,244
  -734,825
Free cash flow, $m
  4,125
  -16,269
  -17,921
  -20,774
  -23,223
  -24,946
  -25,594
  -24,817
  -22,282
  -17,686
  -10,770
  -2,521
  9,596
  24,482
  42,184
  62,701
  85,996
  112,005
  140,642
  171,811
  205,410
  241,340
  279,507
  319,826
  362,226
  406,652
  453,063
  501,436
  551,765
  604,061
  658,350
Issuance/(repayment) of debt, $m
  852
  26,800
  35,293
  45,229
  56,571
  69,204
  82,966
  97,658
  113,061
  128,954
  145,127
  161,389
  177,580
  193,575
  209,284
  224,653
  239,660
  254,313
  268,645
  282,708
  296,572
  310,315
  324,025
  337,796
  351,722
  365,899
  380,421
  395,382
  410,870
  426,975
  443,781
Issuance/(repurchase) of shares, $m
  -1,640
  12,631
  15,206
  17,295
  18,872
  19,622
  19,212
  17,305
  13,585
  7,766
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -857
  39,431
  50,499
  62,524
  75,443
  88,826
  102,178
  114,963
  126,646
  136,720
  145,127
  161,389
  177,580
  193,575
  209,284
  224,653
  239,660
  254,313
  268,645
  282,708
  296,572
  310,315
  324,025
  337,796
  351,722
  365,899
  380,421
  395,382
  410,870
  426,975
  443,781
Total cash flow (excl. dividends), $m
  3,131
  10,531
  17,372
  24,455
  33,347
  44,259
  57,373
  72,841
  90,779
  111,268
  134,357
  158,868
  187,176
  218,057
  251,468
  287,354
  325,656
  366,318
  409,287
  454,519
  501,982
  551,655
  603,532
  657,622
  713,949
  772,551
  833,484
  896,818
  962,636
  1,031,036
  1,102,130
Retained Cash Flow (-), $m
  8,647
  -24,675
  -32,579
  -41,749
  -52,219
  -63,881
  -76,584
  -90,146
  -104,364
  -119,035
  -133,963
  -148,974
  -163,920
  -178,685
  -193,185
  -207,372
  -221,224
  -234,750
  -247,980
  -260,962
  -273,758
  -286,444
  -299,100
  -311,812
  -324,667
  -337,753
  -351,158
  -364,968
  -379,265
  -394,131
  -409,644
Prev. year cash balance distribution, $m
 
  1,513
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  393
  9,894
  23,256
  39,373
  58,283
  79,982
  104,432
  131,567
  161,307
  193,557
  228,223
  265,211
  304,432
  345,810
  389,282
  434,798
  482,326
  531,850
  583,371
  636,905
  692,487
Discount rate, %
 
  6.90
  7.25
  7.61
  7.99
  8.39
  8.81
  9.25
  9.71
  10.19
  10.70
  11.24
  11.80
  12.39
  13.01
  13.66
  14.34
  15.06
  15.81
  16.61
  17.44
  18.31
  19.22
  20.18
  21.19
  22.25
  23.37
  24.53
  25.76
  27.05
  28.40
PV of cash for distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  142
  3,066
  6,098
  8,623
  10,516
  11,716
  12,229
  12,115
  11,479
  10,450
  9,169
  7,768
  6,361
  5,039
  3,862
  2,863
  2,052
  1,422
  952
  615
  383
Current shareholders' claim on cash, %
  100
  89.5
  81.6
  75.6
  71.2
  67.8
  65.4
  63.8
  62.8
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3
  62.3

The Kraft Heinz Company manufactures and markets food and beverage products in the United States, Canada, Europe, and internationally. Its products include condiments and sauces, cheese and dairy products, meals, meats, refreshment beverages, coffee, and other grocery products. The company offers its products under the Kraft, Oscar Mayer, Heinz, Planters, Velveeta, Philadelphia, Lunchables, Maxwell House, Capri Sun, Ore-Ida, Kool-Aid, Jell-O, Cracker Barrel, P’Tit Cheese, Tassimo, Plasmon, Pudliszki, Honig, HP, Benedicta, Weight Watchers, ABC, Master, Quero, Golden Circle, Wattie's, Complan, and Glucon D names. The Kraft Heinz Company sells its products through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, drug stores, value stores, bakeries, pharmacies, mass merchants, club stores, hotels, restaurants, hospitals, health care facilities, and certain government agencies, as well as through its own sales organizations. The company was formerly known as H.J. Heinz Holding Corporation and changed its name to The Kraft Heinz Company in July 2015. The Kraft Heinz Company was incorporated in 2013 and is headquartered in Pittsburgh, Pennsylvania.

FINANCIAL RATIOS  of  Kraft Heinz (KHC)

Valuation Ratios
P/E Ratio 30.7
Price to Sales 4.2
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 21.3
Price to Free Cash Flow 27.9
Growth Rates
Sales Growth Rate 44.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 92.4%
Cap. Spend. - 3 Yr. Gr. Rate 43.9%
Financial Strength
Quick Ratio 2
Current Ratio 0.1
LT Debt to Equity 51.8%
Total Debt to Equity 56.5%
Interest Coverage 5
Management Effectiveness
Return On Assets 3.7%
Ret/ On Assets - 3 Yr. Avg. 2.5%
Return On Total Capital 4%
Ret/ On T. Cap. - 3 Yr. Avg. 2.4%
Return On Equity 5.9%
Return On Equity - 3 Yr. Avg. 3.9%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 38.9%
Gross Margin - 3 Yr. Avg. 34.5%
EBITDA Margin 28.5%
EBITDA Margin - 3 Yr. Avg. 18.6%
Operating Margin 23.2%
Oper. Margin - 3 Yr. Avg. 17.3%
Pre-Tax Margin 19%
Pre-Tax Margin - 3 Yr. Avg. 10.6%
Net Profit Margin 13.7%
Net Profit Margin - 3 Yr. Avg. 7.7%
Effective Tax Rate 27.5%
Eff/ Tax Rate - 3 Yr. Avg. 26.6%
Payout Ratio 103.6%

KHC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the KHC stock intrinsic value calculation we used $26487 million for the last fiscal year's total revenue generated by Kraft Heinz. The default revenue input number comes from 2016 income statement of Kraft Heinz. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our KHC stock valuation model: a) initial revenue growth rate of 44.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.9%, whose default value for KHC is calculated based on our internal credit rating of Kraft Heinz, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Kraft Heinz.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of KHC stock the variable cost ratio is equal to 57%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $5375 million in the base year in the intrinsic value calculation for KHC stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.1% for Kraft Heinz.

Corporate tax rate of 27% is the nominal tax rate for Kraft Heinz. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the KHC stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for KHC are equal to 254.1%.

Life of production assets of 82.9 years is the average useful life of capital assets used in Kraft Heinz operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for KHC is equal to -8.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $57358 million for Kraft Heinz - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 1213.3 million for Kraft Heinz is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Kraft Heinz at the current share price and the inputted number of shares is $111.1 billion.


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Stock chart of KHC Financial statements of KHC
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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